PIONEER STILL TRYING TO CHANGE THE WORLD WITH FUTURES

William B. Crawford Jr., Tribune Staff WriterCHICAGO TRIBUNE

It is no exaggeration to say that Richard L. Sandor, a Brooklyn native, son of a vaudeville musician, and a trained economist, has played an important role in helping make Chicago the world's most important center for hedging financial risk.

Nearly 30 years ago, as a young chief economist for the Chicago Board of Trade, Sandor, amid much gainsaying, invented the U.S. Treasury Bond futures contract. It is a trading vehicle that has helped revolutionize modern finance and guarantee the CBOT's standing as the world's busiest derivatives exchange.

With the CBOT's August 1977 launch of the T-bond contract, traditional considerations that drove pension and investment fund managers to choose one investment vehicle over another, protect against downside moves in interest rates and maximize yields were changed for good.

In addition, the T-bond's skyrocketing growth the last decade has moved market leaders around the world to emulate Chicago's success. The London Financial Futures Exchange and the Marche a Terme International de France in Paris, Europe's leading derivatives markets, as well as exchanges in Sydney, Singapore and other important financial centers of the Pacific Rim, were built in the last 10 years to trade groups of interest rate futures whose roots can be traced directly to the prototype developed by Sandor.

At a recent interview in his office atop a glass-and-steel skyscraper across from the World Trade Center in lower Manhattan, Sandor talked about his continuing fascination with derivatives markets and futures contracts, his affiliation with the CBOT and the Chicago Mercantile Exchange, and his work as chairman of Centre Financial Products Ltd., his latest professional endeavor.

He also talked about his wife, Ellen-a fine arts graduate of the School of the Art Institute of Chicago and director of (Art), a virtual photography laboratory on the campus of the Illinois Institute of Technology-and their daughters-Julie, a Ph.D. candidate in communications studies, at Northwestern University, and Penny, who teaches English in Mexico City and writes poetry.

"I had every confidence that the Treasury bond contract would be a success, even though I was faced with a good deal of skepticism among some members of the Board of Trade at the time," Sandor said.

"The period from 1945 to 1962, years of rapid economic growth and relative peace, as it turns out, was only a blip in the history of our country. Interest rates remained virtually unchanged and there was little need or motivation to explore notions of how to hedge financial risk," he said.

"Then came Vietnam, and I could see deficits piling up and social turmoil and economic uncertainty down the road. After all, I was teaching at Berkeley in 1967," he said.

A graduate of Brooklyn College, Sandor earned a Ph.D. in economics from the University of Minnesota in 1967. He taught at the School of Business Administration at the University of California, Berkeley, before arriving at the CBOT in the early '70s, convinced-in light of the Vietnam War and rising domestic unease-that the time was ripe for a vehicle with which to hedge adverse swings in interest rates.

Sandor found an important ally in Leslie Rosenthal, a longtime CBOT insider who persuaded other top exchange officials to give Sandor a crack at developing a forebear to the T-bond contract-so-called Ginnie Mae futures that would be tied to mortgage-backed securities issued by the Government National Mortgage Corp.

Launched in 1975, the Ginnie Mae futures traded successfully for several years before the interest rate climate changed, investor interest dried up and the contract was delisted.

But its limited successes paved the way for Sandor's most unforgettable futures invention-the T-bond contract. Launched amid many doubters, T-bond trading volume eventually began to soar, and now it is the most popular derivatives contract in the world, accounting for about 60 percent of the 150 million futures bought and sold at the CBOT every year.

Though Sandor left the exchange in the late '70s, he never departed the world of futures. Before joining Centre Financial this year, Sandor was an executive managing director at Kidder, Peabody & Co. in charge of derivative products, and for several years before that he was chief executive of Indosuez International Capital Markets Corp. and chairman of Indosuez Carr Futures in New York.

Nor did he cut his ties to Chicago or its futures exchanges. He and his wife live in Chicago and have a summer home along the southern shore of Lake Michigan. Sandor has served on the board of the Lincoln Park Zoological Society and serves on the board of the Art Institute of Chicago.

Long a consultant to both the CBOT and the Merc, Sandor has carved out a relationship with the two markets-bitter rivals these days-that is practically without precedent. He sits on the governing boards of both.

He has taught courses in futures at Stanford and Northwestern Universities. Recently he was appointed distinguished adjunct professor at the Columbia University Graduate School of Business, where he teaches an advanced seminar titled Environmental Finance.

In the last three years Sandor's presence also has been felt in the creation at the CBOT of two trading products that are in the final phases of development.

One is a three-member family of catastrophic insurance futures, which are designed to help large insurance and reinsurance companies lay off risk associated with hurricanes, tornadoes and earthquakes in the U.S. The other is air pollution futures, which could help utility companies cut sulfur dioxide emissions as mandated by the 1990 Clean Air Act.

At Centre Financial, Sandor-assisted by a 14-member staff liberally sprinkled with individuals who hold Ph.D.s-continues to steep himself in efforts to develop cutting-edge trading instruments to solve similar problems, some having a global scope.

Centre Financial-an affiliate of Centre Reinsurance Co., which is a Bermuda-based subsidiary of Zurich Insurance Group-is under contract with the United Nations to address the problem of air pollution worldwide. In about 30 days Sandor will release a report to the United Nations Commission on Trade and Development that will, among other things, weigh the feasibility of reducing air pollution by allowing industry participants and speculators to trade carbon dioxide entitlements around the globe.

Centre Financial has two other focuses: developing hybrid insurance products to help meet the growing capital needs of the insurance industry, and designing financial risk-management software and exotic option valuation and hedging models.

Sandor, who rarely is at rest intellectually, continues to probe what appear to be the outer limits of new futures trading possibilities. In the process, he has drawn the same skepticism he witnessed three decades ago at Berkeley when he wrote a paper that outlined the feasibility of buying and selling interest rate futures.

Such projects include converting water to a tradable commodity as a means of cleaning up the world's polluted waterways, or perhaps the creation of a cash auction market to sell the right to fish the world's seas-with a futures market to follow-as a way to cut water pollution and protect fish species.

"We see a trend toward the commoditization of air and water," says Sandor.

"If water and air are in free supply, then these elements will be abused as they have been; but if we can create a sense of ownership, then perhaps we can move toward creation of a commodity market grounded in them."